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Secondhand Software a Threat for Tech Industry

EU court ruling paves the way for sales of previously owned software.

As chief of computer systems for Berliner Volksbank, Joerg Bauske has long been dismayed at the amount he spends on software. Now he says he’s found an easy way to cut costs dramatically: Buying used programs.

The move was eased by a July ruling from the European Union’s highest court paving the way for sales of previously owned software. Bauske had some experience in the matter, having bought secondhand copies of Microsoft Office and Adobe Photoshop in 2006 and 2007, when the legality of such deals was less clear.

“We’ve had to be certain that the savings outweigh the legal risks,” Bauske said. “Now there’s less reason to be concerned.”

On July 3 the European Court of Justice ruled in a case brought by Oracle Corp. seeking to prevent Munich-based UsedSoft GmbH from reselling software licenses. The court said developers can’t forbid resale of programs and updates downloaded from the Internet, expanding earlier case law permitting the sale of secondhand software delivered on disk.

Companies spend $250 billion to $275 billion on business software annually, Wang estimates. The total potential value of programs that might find buyers could exceed $1 trillion, Wang said, though the market today is much smaller. In Germany, one of the biggest markets, less than 100 million euros ($131 million) of corporate software was resold last year, according to traders.

UsedSoft, which had sales of about 5 million euros last year, has seen demand triple since the July decision, said Chief Executive Officer Peter Schneider. The verdict “will make the market explode,” he said.

Also fueling the resale business is an injunction from a Hamburg court last month forbidding Microsoft from warning potential buyers of used programs that such deals were illegal unless the software maker approved them.

Chemical and pharmaceuticals company Bayer AG, car-parts maker Magna International Inc., and German retailer Edeka Zentrale AG & Co. are among companies that have tapped the used software market, according to the customer reference lists on the resellers’ websites.

Bayer, Magna

Bayer Business Services, Bayer’s IT branch, says it is re- evaluating the use of secondhand software following the ECJ verdict. Magna declined to comment. Edeka didn’t respond to requests for comment.

Trading used business software isn’t quite as seamless as selling secondhand video games on eBay. Sellers contact companies like UsedSoft with the programs and number of licenses they want to sell. Buyers similarly contact brokers with requests for specific programs. If brokers have the licenses, they quote a price, typically 30 percent to 70 percent of the original cost. The buyer can then use the license information to download the program from the software maker’s Website.

The intermediaries usually take a cut of about 30 percent of the deal, said Boris Voege, co-founder and sales chief at Preo. A notary’s certification testifying that the programs have been deleted from the seller’s computers is often required to complete a deal.

Since not all companies want the latest versions of programs, the process helps sellers monetize an asset that would otherwise be discarded.

“When Microsoft introduced Office 2007, demand for Office 2003 was skyrocketing because companies were used to it,” said Dirk Lynen, CEO of 2ndsoft GmbH, a used software broker in the German city of Aachen.

In the U.S., most software contracts forbid resale, and there haven’t been any decisive challenges to such clauses in court, said Eben Moglen, a Columbia Law School professor and founder of the Software Freedom Law Center.

Still, American companies can tap the market via European subsidiaries. The European decision confirmed the rule across the region that a vendor’s right to control what happens to software expires with the first sale, much as is the case with physical goods.

Maintenance Model

While the most commonly traded programs have been Microsoft’s Windows and Office and Adobe’s Photoshop, makers of specialized business software have also fought resellers. A Dusseldorf court ordered SAP AG in 2009 to stop telling a prospective buyer it would violate the law by purchasing pre-owned licenses.

“This model is seen as very critical by SAP,” SAP’s chief financial officer, Werner Brandt, said on a July 24 conference call. “We do not want to see this second market of our licenses evolving.”

Officials at Microsoft and Oracle declined to comment on used software.

The decision could also threaten the ability of software developers to sell servicing agreements for their programs, a high-margin business that they count on for long-term revenue. Maintenance companies such as Spinnaker Support LLC and Rimini Street Inc. are seeing growing sales of software maintenance contracts that don’t include the programs’ writers.

In 2010, Oracle filed a lawsuit in U.S. District Court in Nevada against Rimini Street, a Las Vegas company that provides software support. Oracle argues that Rimini’s business violates Oracle’s intellectual property. The case has yet to be resolved.

The original vendors could counter the threat of resellers by offering software on a rental basis rather than selling it, said Christian Czychowski, who specializes on copyright and media law at Boehmert & Boehmert.

They could also sell larger license packages, which would be tougher to trade because the European court ruled that such bundles cannot be broken up and sold piece by piece. While it may take years, Czychowski said, it’s likely that software companies will ultimately deliver most of their programs as an ongoing service rather than a one-off sale.

“In the future we will market software less and less like a physical good,” Czychowski said. “Instead it will be sold like electricity, priced according to how much you use it. Then used software would no longer be an issue.”

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